Why National Minumum Wage negotiations are deadlocked

Are business negotiators representing the best interests of their constituency?

Photo of Neil Coleman
Neil Coleman talking at a symposium on the National Minimum Wage. Photo supplied

After more than 18 months of negotiations on the National Minimum Wage (NMW) in the Wage Inequality Task Team in Nedlac, talks have effectively deadlocked. This article analyses the forces underlying the deadlock.

A fundamental difference has manifested itself in the NMW negotiations between those proposing a NMW at the bottom of the current minimum wage structure (ie one which entrenches ultra-low wages) versus proposals for a bold, meaningful NMW which breaks with the current wage structure, while proposing an incremental transformation over the medium term.

Labour and Community constituencies in Nedlac have sought to promote the interests of working class communities, by advancing a vision of transforming an economy based on cheap labour. On the other side, business representatives, together with those in the state, particularly Treasury, believe that a model of wage repression is the route to growth. But this backward approach is neither in the interests of the state, and the developmental view it espouses, or even in the interests of business as a whole. The cheap labour road is exhausted and will only exacerbate the economy’s structural problems, as well as the social contradictions which are deepening by the day.

Labour’s strategy on the NMW, supported by the community constituency, has been to seek to forge a compromise, which:

  • Proposes an incremental but bold approach to phasing in a meaningful NMW over the medium term. This incremental strategy aims to break with the current ultra-low wage structure in a managed way.

  • Sees the NMW as being part of a new Wage Policy aimed at addressing wage inequality and working poverty in a holistic manner, including through addressing issues of excessive executive and management pay.

  • Links the NMW to a broader social protection package, which takes some of the pressure off the wage, particularly by extending income support to the unemployed (thereby raising the real value of the wage to the household).

  • Recognises that the NMW is a wage floor, which is not intended to substitute for collective bargaining, or to set actual wages throughout the economy, but needs to be complemented by stronger collective bargaining which sets wages above the NMW floor at a sectoral level.

  • Recognises that the main aim of the NMW is to assist in dealing with working poverty, and wage inequality.

  • Recognises that the NMW is not a silver bullet for all issues, e.g. employment, but if this new wage policy is combined with the correct macro-economic and industrial policies can provide a major boost for development (including through the stimulus effect of putting more income in the hands of the working poor).

Compelling evidence suggests that 22 years after democracy, the cheap labour basis of our economy has not been transformed. Despite formal rights in labour legislation, and some gains for unionised workers, the position of low-paid South African workers has been worsened by labour market restructuring, including casualisation and atypical work, labour broking, contracting out etc.

The earnings of black and women workers at the bottom of the wage structure have either stagnated or been driven down in real terms. For example in 2010 50% of workers earned below R2,900, and by 2015 the median wage had actually declined in real terms- 50% of workers earned below R3,100. For women workers it was even worse: the median wage being R2,400 in 2010 and R2,700 in 2015. These ultra-low wages are around half the income needed to meet the poverty line: a basic poverty line was R5,544 in Feb 2016 for a household of four (three being the average number of dependants for poor workers).

At the same time the gap between the low paid in the workforce and management has grown at an alarming rate: in 2010 the top 5% of employees on average earned around 30 times more than the bottom 5% employees. By 2014, this had increased to almost 50 times. In the space of four years!

Are wages high in South Africa? According to the World Bank: “High wages in South Africa appear to be mainly due to high wages for managers and professionals and not to high wages at the bottom of the income distribution (World Bank, 2012).” The UNDP in 2014 stated: “A premium is paid for professional and managerial skills in the South African economy… the median monthly wage for a manager in South Africa was more than double that of Poland and three times that in Brazil…”

Therefore a new Wage Policy must include not only a NMW, but also a package to reconfigure the wage structure, with the main aim of reducing excessive wage differentials, including through systematically raising the wages of those in the bottom half of the wage structure, and capping wages at the top end. We need to implement our own wage solidarity alternative drawing from experiences as diverse as Scandinavia, Germany, Japan, the Asian Tigers, and Latin America.

Section 27 of our Employment Equity Act aimed at reducing excessive wage differentials. But Section 27 has never been implemented. The obscene levels of wage inequality, and extent of fat in our wage structure, means that space exists to substantially reconfigure our wage structure without excessive economic shocks. This was shown at a micro level with the PPC experiment where PPC CEO Khetso Gordhan took a large pay cut (as did 60 top executives) to reduce the gap between their salary and those of the lowest-paid. 1,000 PPC workers at the lowest pay-grades got an increase of about R10,000 per year. This reduced the ratio from 120:1 to 40:1 within the space of a couple of years.

A recent study shows the disturbing persistence of apartheid wage premiums and practices, even at professional levels of the workforce: Analytico consultancy’s study published in July 2016 found that white male professionals were paid a median salary of R30,453 per month compared to black male professionals who were paid a median of R9,224 per month. White female professionals earned a median of R17,700 versus black professionals, who were paid a median of R11,155 per month. The study found that Black professionals also have a higher probability of unemployment, despite earning lower salaries.

The bottom half of the wage structure reflects the most extreme form of this apartheid wage legacy: research done by the Wits NMW Research Initiative show that at the beginning of 2016 around 54% of full-time workers, or 5 and a half million (overwhelmingly black) fulltime workers earned below the working poor line of R4,317 per month. This is the minimum wage workers have to earn in order for them and their dependants to escape absolute poverty. These shocking statistics indicate that, if we assume an average of three to four dependants per breadwinner, between 22-27.5 million South Africans- nearly half the population - are living in poverty because of ultra-low wages. This establishes the inextricable link between low wages and poverty in the country.

Who are these working poor? They are the majority of workers in all sectors of the economy, with the partial exception of the public sector and local government, to a certain extent mining (where wages are generally higher, but so are economic pressures, as rurally based mineworkers have a large number of dependants to support) and higher paid parts of manufacturing.

So what do these labour market realities mean for the developmental challenges facing South Africa, which is categorised as a middle-income economy? The middle-income trap theory states that middle-income countries find themselves in a trap because they can’t compete with ultra-low wage economies; but also can’t compete with high productivity economies. In theory there are only two options to escape this trap: either radically repress wages to compete with low-wage countries; or go up the value chain, diversify the economy, develop innovation and manufacturing etc. Simon Deakin, a labour law expert who focuses on economic development, argued (in the Keynote Address to the 2016 SASLAW conference) that the National Minimum Wage plays a key role in bridging the middle-income trap ‘by promoting domestic consumption and encouraging industrial upgrading’. The low road option of repressing wages has been tried in South Africa and failed.

The high road of raising income and promoting greater equity is more promising, not only from a moral, but also a developmental point of view. Evidence is emerging from a range of countries that a rising NMW can promote a high road model of both raising wages, and quality of jobs - making precarious, informal, and low-paid work more formal. In Germany, since a NMW was introduced in January 2015, we have seen the replacement of many casualised or ‘mini-jobs’ with permanent jobs (and a net job creation of over 100,000). Prof Stephanie Luce, a US minimum wage expert, argues that a similar phenomenon is taking place in the USA, most interestingly in SMMEs which are raising the quality of jobs, as they can’t afford a higher turnover, when they have so few employees. Finally the formalisation of work combined with rising minimum wages has been well documented in Latin America, in countries such as Uruguay Argentina and Brazil.

So evidence which is emerging on NMWs internationally is producing counter-intuitive results, which goes against much of the conventional wisdom. This includes that a rising NMW can:

  • Go together with formalisation (Latin America)

  • Replace precarious jobs with permanent higher quality jobs (Germany)

  • Encourage SMMEs to invest more in higher quality jobs, because they can’t handle a higher turnover (USA)

  • Even act as a break on capital intensity, as automation requires lower skilled workers to operate it.

On the issue of employment, neoclassical’ economic models are unable to capture the economy wide impact of rising income, productivity etc which can accompany rising minimum wages. They are therefore unable to reflect the reality that rising wages do not necessarily lead to job loss, but combined with appropriate policies, can actually lead to job increases. These models both fail theoretically, and are unable to predict real world outcomes. This was seen in countries as diverse as Germany, the UK, and Latin America, where catastrophic predictions of job destruction failed to materialise.

These models also failed to accurately forecast the real world impact of rising minimum wages in South Africa, but are again being used to predict massive job losses for a NMW introduced at a level lower than current sectoral minima. Models used by National Treasury and DPRU predict 100,000 to 500,000 job losses for a NMW set at between R1,258 to R2,200! In contrast the Wits NMW RI study, in line with growing international evidence on the minimal employment impact of a rising NMW, argues that a NMW set at between R3,700 and R4,500 would have no significant disemployment effect.

The low road alternative is to pursue a ‘race to the bottom’ wage repression scenario. This would involve further lowering existing ultra-low wages, which already thrust 5.5 million workers and their dependents into poverty. This is economically, socially, and morally unviable and unacceptable. Unfortunately this is the route proposed by Treasury through the NDP, and influential sections of business are attracted by this option. Arguably however this route is neither in the interests of the South African state, or even in the interests of business itself, which is currently in a downward spiral of non-investment, lack of conducive macro-economic conditions, and low levels of effective demand both in South Africa and the region (because of poverty).

This economic stagnation is combined with a parasitic relationship by powerful sections of business with the South African economy, including stripping of assets from the country, tax evasion, speculative activity, and an investment strike. These acts in turn deepen our structural problems. Some in the productive sector of the economy, on the other hand, appear to recognise that this low road route is a cul de sac, and share a number of labours concerns on the economy- see Declaration of Manufacturers and Trade Unions. However this sector of business lacks critical mass. Will their influence increase with the development of the black industrialists programme, or will this be another case of fronting which doesn’t challenge the current economic structure?

The deadlock in Nedlac on the National Minimum Wage is therefore fundamentally about different interests as well as different visions about how to get out of our socioeconomic crisis.

These interest and visions are not necessarily static, but are subject to social contestation, and therefore can be shifted, both by the social pressure exerted from below for transformation in the wage structure, as well an effective case being made that the alternatives are conducive to a more functional growth path.

This requires progressive forces to both mobilise society, as well as intelligently engaging with the secondary contradictions in capital and the state. We also need to contend with potentially different approaches within labour and community.

A particular challenge is that business in South Africa is dominated by the finance/mining nexus, and the productive manufacturing sector has a limited voice. Further there is a growing trend, both in South Africa and internationally, for business to use consultants as professional negotiators, who are not that interested in engaging on the issues. Indeed their mandate seems to be to block progress in certain areas. This doesn’t necessarily reflect the views of business on the ground. A fascinating survey was leaked in the USA showing that a clear majority of businesses surveyed (80%), including SMMEs, supported an increase in the NMW, and that professional business organisations rejecting such an increase didn’t represent their views.

The defensive, backward approach taken by business in the negotiations has led to negotiators adopting postures seemingly designed to create deadlocks and drag out the process. This is reflected in:

  • A refusal to engage on concrete proposals tabled by the parties, using every possible technique to delay and obstruct.

  • A refusal to engage on the evidence they don’t agree with, including refusing to allow alternative research perspectives to be presented in Nedlac.

  • This intransigent attitude has been emboldened by the approach taken by some government negotiators, particularly those from Treasury, which is indistinguishable from that of business.

There has been much talk in recent times about the need for a social accord in South Africa. The National Minimum Wage negotiations in many respects are a microcosm of issues that any ‘social accord’ discussions would need to confront. They raise the question as to whether established business is prepared to abandon the predatory economic model of super-exploitation and ultra-low wages as a sine qua non for any constructive discussion on possible forms of social co-operation. At this point the picture is not encouraging.

Coleman is the Labour Spokesperson for the Wage Inequality Task Team.

Views expressed are not necessarily GroundUp’s.


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